Overview

Typical transaction structures – public companies

What is the typical structure of a business combination involving a publicly traded real estate-owning entity?

Generally, business combinations under Nigerian law occur through takeovers, mergers and acquisitions. Thus, business combinations involving publicly traded real estate businesses may occur through any of the aforementioned ways. An acquisition may be direct or indirect, and the special purpose vehicle structure is typically used for business combinations when acquiring the interest in the real estate business on behalf of the parties. This structure typically takes tax, regulatory requirements, corporate approvals, relevant third-party approvals, regime and other considerations into account. The interest to be acquired may be all or part of the issued share capital of the publicly traded entity or the assets or liability, or both, of the real estate entity.

There may also be business combinations involving a real estate investment trust (REIT) for the sole purpose of acquiring intermediate or long-term interests in real estate or property development that may raise funds from the capital market through the issuance of securities.

Structuring options are typically influenced by tax considerations, regulatory requirements and limitations in the constitutional documents of the real estate entity (the target).

Typical transaction structures – private companies

Are there any significant differences if the transaction involves a privately held real estate-owning entity?

There are no major differences for a transaction involving a privately held real estate-owning entity; however, the legal and regulatory requirements are considerably reduced. Additionally, the parties enjoy privacy for the transaction as there is no need to inform the public either through print or electronic media. Combinations involving privately held real estate-owning entities are more common than those involving publicly held real estate-owning entities.

Typical transaction process

Describe the process by which public and private real estate business combinations are typically initiated, negotiated and completed.

Pre-definitive agreements

Typically, the proposed investor and the target have prior conversations either directly or with the financial advisers. Thereafter, the investor sends a non-binding offer letter; if the offer is accepted, the parties execute a non-disclosure or confidentiality agreement and the investor proceeds with a due diligence exercise on the target. A term sheet detailing the terms, conditions and structure for the transaction will also be sent by the investor to the target.

Definitive agreements

Where the outcome of the due diligence exercise is satisfactory to the investor, the legal advisers draft and negotiate the definitive agreements. The type of definitive agreements (share or asset purchase agreement, share subscription agreement, non-compete agreement, management service agreement, scheme of arrangement, shareholders agreement) typically depends on the contemplated transaction structure.

Post execution of the definitive agreements

Upon the execution of the definitive agreements, the necessary consent or approval of regulatory authorities will be procured. The approval is dependent on the structure of the transaction. Where the entity is a public company, the parties may be required to notify the relevant regulatory authorities prior to the execution of the definitive agreements.

Furthermore, subject to the agreed structure of the transaction and the completion events stated in the transaction documents, completion may occur by way of a simultaneous exchange of documents. Where a simultaneous exchange and completion occurs, the full consideration becomes immediately payable.

Law and regulation

Legislative and regulatory framework

What are some of the primary laws and regulations governing or implicated in real estate business combinations? Are there any specific regulations or laws governing transfers of real estate that would be material in a typical transaction?

Although there are a number of laws and regulations, including sector-specific laws, that govern business combinations, there are no laws and regulations that directly govern and regulate real estate business combinations. The primary laws and regulations governing business combinations generally in Nigeria, which are also applicable to real estate business combinations, are:

  • the Companies and Allied Matters Act 2004 (CAMA);
  • the Companies Regulations 2015;
  • the Investment and Securities Act 2007;
  • the Securities and Exchange Commission Rules and Regulations (the SEC Rules and Regulations);
  • the Federal Competition and Consumer Protection Act 2018 (FCCPA); and
  • the Nigerian Stock Exchange Rule Book 2015.

Under the Land Use Act 1978, any transfer of interests in a real estate asset requires the consent of the governor of the state where the asset is located, and when the asset is located in the Federal Capital Territory, Abuja, the consent of the minister is required. In practice, however, particularly with respect to the transfer of the real estate assets of one entity to another, such as in a scheme of arrangement, a court order sanctioning the scheme of arrangement is obtained, which the court order usually provides for and gives effect to the transfer of the real estate assets between the parties.

Pursuant to the Registration of Land Instruments Act and the relevant Land Instruments Registration Laws and Registration of Titles Law of the various states in Nigeria, any judgment of a competent court of record relating to a real estate asset is a registrable instrument and ought to be registered at the Land Registry Office. Municipal laws and policies in some states may impose or require payment of transfer taxes, such as consent or administrative fees and stamp duty charges or other sundry charges.

Cross-border combinations and foreign investment

Are there any specific material regulations or structuring considerations relating to cross-border real estate business combinations or foreign investors acquiring an interest in a real estate business entity?

The FCCPA grants the Federal Competition and Consumer Protection Commission (FCCPC) primary regulatory oversight over mergers, acquisitions and business combinations in (or affecting) Nigeria and reviews all mergers and other business combinations and arrangements to ensure that such combinations do not distort or impede the markets.

Under the FCCPA, business combinations may not be implemented unless approval has been given by the FCCPC. Typical steps required in obtaining consent from the FCCPC/Securities and Exchange Commision (SEC) joint desk include confirming whether the transaction falls under the threshold for mandatory approval. This step will determine whether the parties must simply notify the FCCPC/SEC joint desk or if they must formally apply for an approval of the transaction prior to the execution of the definitive agreements.

Choice of law and jurisdiction

What territory’s law typically governs the definitive agreements in the context of real estate business combinations? Which courts typically have subject-matter jurisdiction over a real estate business combination?

Choice of law is typically a contractual obligation and the stipulation to submit to a specific jurisdiction is dependent on the structure of the transaction. Though there are no specific laws mandating the choice of Nigerian law to govern agreements, security documents are typically subject to Nigerian laws if they are to be enforceable in Nigeria.

The FCCPC, being the primary regulatory body for mergers, acquisitions and business combinations in Nigeria, is a newly constituted body and is yet to release its rules and regulations. Therefore, we cannot confirm if the FCCPC will mandate all definitive agreements to be governed by the laws of Nigeria.

The Constitution of Nigeria confers the exclusive jurisdiction on the Federal High Court of Nigeria to try matters relating to mergers and acquisitions.

Approval and withdrawal

Public disclosure

What information must be publicly disclosed in a public-company real estate business combination?

Information on the following must be publicly disclosed in an information memorandum to be submitted to the FCCPC/SEC joint desk for approval of the transaction:

  • Background:
    • background to the transaction;
    • statement of transaction objective;
    • parties to the transaction;
    • list of assets to be acquired and their value (where applicable); and
    • statement of financial capability of the investor.
  • Offer:
    • purchase consideration;
    • comparison of purchase consideration with historical market price (where applicable);
    • effect of the transaction on the management and employees of the target;
    • terms and conditions of the transaction;
    • manner of acceptance; and
    • source of funding the transaction.
  • Investor:
    • history and business;
    • share capital and ownership structure;
    • director’s beneficial interest; and
    • five years’ financial summary.
  • Target:
    • history and business;
    • share capital and ownership structure;
    • director’s beneficial interest;
    • five years’ financial summary; and
    • summary of claims and litigations, and material contracts.
  • Effects of the acquisition on the relevant industry:
    • line of operation of investor;
    • statement of existing investment in a related line of business; and
    • analysis of the market share of the acquirer in the relevant industry.

The same disclosure requirements apply in an all-cash transaction or in connection with a combination that involves consideration in the form of shares.

Duties towards shareholders

Give an overview of the material duties, if any, of the directors and officers of a public company towards shareholders in connection with a real estate business combination. Do controlling shareholders have any similar duties?

The directors of a public or private company owe a number of material duties to the company and its shareholders. Many of those duties have been developed by the courts over hundreds of years forming the common law rules and equitable principles applicable today. Several have been codified into statute. The main duties include:

  • to act in good faith and to use their powers for the benefit of the company as a whole;
  • to exercise independent judgment and not to delegate powers except with proper authorisation;
  • to exercise reasonable care, skill and diligence;
  • to avoid a situation in which the director has, or could have, a direct or indirect interest that conflicts, or may conflict, with the interests of the company;
  • not to enter into transactions in which the directors have an interest except in compliance with the requirements of the law;
  • not to gain any advantage from use of his or her position as a director;
  • not to make any unauthorised use of the company’s property or information;
  • not to accept any personal benefit from third parties conferred because of the director’s position; and
  • to keep proper accounting records.

The aforementioned duties are material irrespective of the proposed transaction structure provided that the target is a company incorporated under the laws of Nigeria.

Shareholders’ rights

What rights do shareholders have in a public-company real estate business combination? Can parties structure around shareholder dissent or rejection of a real estate business combination, and what structures are available?

A shareholder generally has the right:

  • to attend meetings of the company;
  • to receive annual reports;
  • to receive dividends;
  • to participate in decisions of the company that are reserved for shareholders (either under the company’s articles of association or by statute); and
  • to inspect the company’s minute books and securities registers.
Shareholders’ rights in business combinations

Shareholders have appraisal rights in business combinations. However, these rights are only exercisable by dissenting shareholders who did not tender their shares in response to a takeover bid. These shareholders may apply to the court for an assessment and valuation of their shares, following which the offeror or transferee company (as the case may be) will be bound to purchase those shares at the price and terms determined by the court.

Shareholders’ rights in a going-private transaction

In relation to a going-private transaction, where an application is made by the directors in the prescribed form and a resolution of the board is passed proposing the conversion, a special resolution would be required by the shareholders authorising the conversion. Within 28 days of passing the resolution, dissenting shareholders of the company holding 5 per cent of the nominal value of the issued share capital of the company may apply to the court for the cancellation of the resolution. In this regard, no action may be taken by the Corporate Affairs Commission (CAC) until an order of court is received to proceed with the conversion.

The statutory protections and rights available to shareholders include:

  • the ability to bring legal proceedings in the company’s name, including against the directors of the company, with the permission of the court;
  • the ability to apply to the court for orders in cases where the shareholder believes the company has been run in a manner that is unfairly prejudicial to a member, or contrary to the interest of the members as a whole; and
  • the ability to call a meeting of the company and propose resolutions.

Some of these rights can be altered by:

  • the company’s articles of association (depending on whether the company is a private, public or listed company);
  • the terms of the shares issued to the shareholder; and
  • the terms of a shareholders’ agreement.

The governing law of the definitive agreement does not affect the rights of these shareholders.

Termination fees

Are termination fees typical in a real estate business combination, and what is their typical size?

Termination fees are a form of deal security measure in real estate business combinations. Termination fees are typically subject to negotiation between the parties and there is no express quantification. The break-up fee is typically a percentage of the deal’s total value. However, parties must ensure that break-up or reverse break-up fees are not punitive or re-characterised as a penalty. Thus, parties can use break-up fees and lock-out arrangements to protect their deals from third-party bidders.

A bidder in a real estate business combination may seek to include the following provisions in the relevant deal documentation: lock up; exclusivity; and break fees.

Takeover defences

Are there any methods that targets in a real estate business combination can employ to protect against an unsolicited acquisition? Are there any limitations on these methods?

Rule 445(3) of the SEC Rules and Regulations, as amended, prescribe exemptions for the requirement of a mandatory takeover, including:

  • when there are fewer than 20 members representing 60 per cent of the target company or such other members as may be prescribed by the SEC from time to time;
  • when an ailing company undertakes a private placement approved by the SEC, which results in the strategic investor acquiring more than 30 per cent of the voting rights of the company;
  • when shares carrying 50 per cent or more of the outstanding voting rights of the company are held directly or indirectly by one person; or
  • when holders of shares carrying 50 per cent or more of the outstanding voting rights of the company state in writing that they would not accept a mandatory bid.
Notifying shareholders

How much advance notice must a public target give its shareholders in connection with approving a real estate business combination, and what factors inform this analysis? How is shareholder approval typically sought in this context?

For business combinations such as mergers and acquisitions and takeovers, a copy of the shareholders’ resolution approving the business combination is one of the requirements of the SEC/FCCPC joint desk in approving the business combinations. For a public company, this would entail the issuance of 21 days’ notice for a meeting of the shareholders to pass the requisite resolution, while a private company may either hold a physical meeting requiring 21 days’ prior notice or pass a written resolution of its shareholders.

Taxation and acquisition vehicles

Typical tax issues and structuring

What are some of the typical tax issues involved in real estate business combinations and to what extent do these typically drive structuring considerations? Are there certain considerations that stem from the tax status of a target?

Evaluating the incidence of taxes and the resulting implications is key in any business combination both prior to and post the transaction. To a large extent, tax considerations play an important role in the structuring of business combinations.

Adequate due diligence should be carried out to identify the tax exposure and compliance level of a target company with respect to its: corporate income tax (CIT); education tax; capital gains tax (CGT); stamp duties; and payroll-related taxes. Other considerations would centre on the available tax assets of the target company, such as withholding tax credits, unrelieved capital allowances and unabsorbed tax losses. It is also advisable to consider the issue of applicability of the commencement and cessation of the tax rules after the business combination transaction.

Mitigating tax risk

What measures are normally taken to mitigate typical tax risks in a real estate business combination?

In the acquisition process, parties usually ensure that the appropriate party bears the incidence of tax and that a proper financial diligence is conducted on the target. The acquirer must also ensure that strong warranties are given by the target in respect of all unpaid taxes and that these are factored into the cost for perfection of title.

Also, where the business combination is debt-financed and backed by a security, to manage the stamp duty costs, parties sometimes agree to stamp (and secure) for a nominal or lower amount in the first instance, on the understanding that subsequently, where the need arises, the security will be up-stamped for the full obligation. This arrangement ensures that the investor only incurs the full stamp duty obligation when necessary.

Types of acquisition vehicle

What form of acquisition vehicle is typically used in connection with a real estate business combination, and does the form vary depending on structuring alternatives or structure of the target company?

The most common acquisition vehicle for real estate business combinations is a limited liability company (LLC) although another option is a REIT. The acquisition vehicle to be used for an investment in a real estate business will depend on the objectives of the investor. A major benefit of investing in REITs is the reduction of liquidity risks associated with directly holding or owning real properties. Through a REIT, an investor can invest in commercial properties without the large capital required for purchasing the properties directly. A REIT also provides a competitive yield and offers minimal investment risks owing to the priority given to the ‘investor creditor’, as well as tax advantages. Investment through an LLC is, however, the most common acquisition vehicle because of the corporate personality of an LLC.

Dividends of publicly traded REIT securities are exempt from withholding taxes. Payment of value added tax (VAT) and CGT on these units or securities is also not applicable. However, this exemption does not preclude the special purpose vehicle that could be a company or an investment trust for payment of CIT. Income-derived investments in government securities and corporate bonds are deducted before arriving at the taxable incomes for CIT purposes.

Furthermore, capital allowance can be claimed on the investment properties of the REITs because these properties are considered to be ‘in use’ for the generation of business profits. This allows for a further relief on the computed taxable profits for CIT purposes for a period of 10 years on each of the investment properties.

When the real estate assets are stated at fair values, these values act as a boost to the profit or loss accounts and the net assets of the investment trust or company without necessarily attracting immediate cash tax payments. Only the future CGT payable on fair values is calculated and recognised as deferred tax. Upon eventual sale of these investment properties, rollover relief is available (to suspend the CGT payable) where the proceeds of sale are employed in acquiring another asset of the same class.

Foreign loans obtained to fund the REIT’s investments can also be structured to gain full advantage of the tax exemptions on foreign loans. There are graduated scales of percentage tax exemptions on interest payments on foreign loans where they satisfy certain grace and repayment period requirements. 100 per cent tax exemption is allowed where the grace period of the loan is not less than two years and the total repayment period for the loans (including the grace period) is above seven years.

Take-private transactions

Board considerations in take-private transactions

What issues typically face boards of real estate public companies considering a take-private transaction? Do these considerations vary according to the structure of the target?

Other than the financial and commercial decisions that the boards of real estate public companies considering a take-private transaction would be required to make, the board would typically also be burdened with the regulatory requirement for the transaction.

Section 53 of CAMA lists certain requirements for the re-registration of a public company as a private company, including:

  • applying to the CAC in the form prescribed;
  • ensuring that the company is not in default of any relevant legislation;
  • altering the memorandum and articles of association of the company; and
  • holding an annual general shareholders’ meeting (AGM) or extraordinary general shareholders’ meeting (EGM) to pass the special resolution approving the re-registration.

A private company cannot have more than 50 shareholders. Accordingly, a buy-out of its shareholders is necessary where it has more than 50 shareholders.

When the company is a publicly listed company, it will be required to follow the delisting process, which includes:

  • holding a meeting of its directors and passing a resolution to delist the company;
  • proposing an AGM or EGM to pass the resolution to delist the company;
  • drafting a notice containing the proposed resolution to be submitted to the Nigerian Stock Exchange for vetting and approval;
  • publishing the notice in at least two national daily newspapers at least 21 days before the AGM or EGM;
  • allowing the Nigerian Stock Exchange to observe proceedings at the AGM or EGM;
  • procuring a simple majority of members present at the AGM or EGM in person or by proxy to approve the delisting; and
  • ensuring the majority shareholder or core investor sets aside sufficient funds to pay off any shareholder who does not want to remain a member of the company in its unlisted status subject to the following conditions:
    • funds must be kept with a custodian acceptable to the Nigerian Stock Exchange; and
    • the price at which unwilling shareholders are bought shall not be less than the highest price at which the company traded in the six months preceding the date of the AGM or EGM where the resolution to delist was passed.

These considerations will apply provided that the target is an LLC in Nigeria.

Time frame for take-private transactions

How long do take-private transactions typically take in the context of a public real estate business? What are the major milestones in this process? What factors could expedite or extend the process?

Subject to unforeseen circumstances, a take-private transaction typically takes five to six months.

The major steps in the process include:

  • corporate approval: a special resolution of the company and a board resolution approving the re-registration and conversion to a private company and amending the memorandum and articles of association to reflect the features of a private company (such as restricting transfer of shares) will be required;
  • application to the relevant bodies: upon receipt of the corporate approval, the company will be required to make an application to delist/re-register the company, as applicable; and
  • issuance of certificate of incorporation: upon approval from the relevant bodies, the CAC will issue a certificate of registration to the company evidencing its re-registration as a private company.

The take-private transaction may be protracted if dissenting shareholders holding up to 5 per cent of the shares in the company oppose the proposed take-private transaction.

Negotiation

Non-binding agreements

Are non-binding preliminary agreements before the execution of a definitive agreement typical in real estate business combinations, and does this depend on the ownership structure of the target? Can such non-binding agreements be judicially enforced?

Preliminary agreements, such as letters of intent, offer letters and term sheets, are common in real estate business combinations. The agreements generally set out the terms upon which the acquirer intends to undertake the transaction.

If the parties specifically agree that the terms of preliminary agreements are binding, the courts generally uphold them as binding. This is true irrespective of the transaction structure.

Typical provisions

Describe some of the provisions contained in a purchase agreement that are specific to real estate business combinations. Describe any standard provisions that are contained in such agreements.

In a real estate business combination when real property is generally the subject of acquisition, it is typical to include representations and warranties as to the target company’s title of the real estate assets; warranties as to the legality of the transaction; existing liens and other encumbrances; and indemnity against third-party claims or regulatory liability in respect of the transaction and the real estate assets.

The warranties in respect of title generally provide that the seller owns the assets that are used for doing business. While the tax warranties provide that the seller has paid all taxes due in respect of the properties of the business.

Stakebuilding

Are there any limitations on a buyer’s ability to gradually acquire an interest in a public company in the context of a real estate business combination? Are these limitations typically built into organisational documents or inherent in applicable state or regulatory related regimes?

There are no restrictions that preclude the gradual acquisition of a real estate public company. When the buyer attains more than a 30 per cent shareholding in the company, it is necessary to disclose the interest to the SEC.

Certainty of closing

Describe some of the key issues that typically arise between a seller and a buyer when negotiating the purchase agreement for a real estate business combination, with an emphasis on building in certainty of closing. How are these issues typically resolved?

Whether the transaction is an asset or share deal or a typical merger and acquisition, parties will make relevant provisions for completion. The completion date will be either a fixed date or subject to the occurrence of specified events.

Failure of completion will arise from either a party’s default or because of both parties’ actions and resulting consequences, such as the right of the innocent party to claim any of the available remedies (eg, damages, specific performance or rescission).

Environmental liability

Who typically bears responsibility for environmental remediation following the closing of a real estate business combination? What contractual provisions regarding environmental liability do parties usually agree?

Generally, in real estate transactions, the common law principle of ‘buyer beware’ applies with regard to environmental remediation. It is expected that before proceeding into a contract regarding property, the purchaser must ensure to carry out due diligence on the property to spot the environmental hazards that the property may be exposed to. Environmental liabilities usually pass to the buyer as the new owner. However, the responsibility of environmental remediation is dependent on the agreement of both parties and parties may agree on specific liability on known environmental issues.

The contractual provision that caters to this is the representation and warranty clause.

Other typical liability issues

What other liability issues are typically major points of negotiation in the context of a real estate business combination?

Typically, the liability of the sellers of a real estate business asset cease after the close of the transaction. All known liabilities are often the responsibility of the sellers in the course of the transaction and prior to closing. The parties may, however, negotiate certain specific liabilities that are to be retained by the sellers after the transaction, and indemnities and warranties are always extracted from the seller. The scope depends on the parties and these may include liability issues, such as placing a cap on overall damages, the extent or degree of liability or damage that will ground a claim and other arrangements, such as third-party guarantees, holdback and escrow arrangements to provide comfort to the buyer.

Sellers’ representations regarding leases

In the context of a real estate business combination, what are the typical representations and covenants made by a seller regarding existing and new leases?

With respect to leases, the seller may be required to make certain representations that it will be held to for the protection of the buyer. The list of representations is not closed and the usual representations and covenants regarding existing leases relate to matters on outstanding payment obligations to government agencies or the tenants, regulatory and compliance issues, any pre-emptive rights of purchase or any rights of first refusal to purchase the leased asset granted by the seller to the tenant. Additionally, covenants prohibiting any new leases or limiting the term of years and the extent of rights to be granted under a new lease may be imposed during the transaction cycle and prior to closing.

Due diligence

Legal due diligence

Describe the legal due diligence required in the context of a real estate business combination and any due diligence specific to a real estate business combination. What specialists are typically involved and at what point in the transaction are the various teams typically brought in?

In carrying out due diligence, two critical factors must be considered: timing and the structure of the business combination. It is always better to carry out the due diligence early in the process. In terms of structure, the due diligence process will depend on whether the transaction is structured as an asset sale, share sale or a merger of entities.

Generally, due diligence will focus on the following: the title of the real estate asset, to verify its ownership, and the nature of title to be acquired; and discovering any pending litigation or encumbrances on the asset, such as liens, charges, mortgages, easements and other third-party rights over the property. A proper review of all title documents is required to highlight specific issues, such as pre-emptive rights, restrictive covenants, prohibitions against assignments and requirements for third-party consents.

In any real estate business combination, such as a merger and acquisition, necessary corporate searches will be conducted at the CAC to ascertain the target company’s ownership, its directors and any other relevant information about the company that may affect the transaction. It is important that relevant experts are engaged to critically investigate matters such as tax issues, employment and staff benefits, asset audit, and valuation and environmental risk exposure. It is also necessary to check the target company’s exposure to litigious claims.

The specialists involved in the due diligence process are usually solicitors, accountants and auditors, and estate surveyors and valuers.

Searches

How are title, lien, bankruptcy, litigation and tax searches typically conducted? On what levels are these searches typically run? What protection from bad title is available to buyers, and does this depend on the nature of the underlying asset?

Title searches are usually conducted at land registries located within each state where records of title of real estate assets are kept. Tax searches on target entities are usually conducted at the local Federal Inland Revenue Service office, or the specific government agency in charge of enforcing the relevant property tax regime in the state where the property is located, to ascertain if there are any outstanding tax payments due on a specific real estate asset.

To determine if there is existing litigation on a real estate asset or a target company, a visit to the registry of the regular courts is required. There is, however, a property litigation registry in Lagos State where all litigation on properties are listed and members of the public can access the database upon payment of a fee.

In Nigeria, there is no provision for title insurance and the state does not give a title guarantee. It is incumbent on the party conducting the due diligence to ensure that it carries out all relevant checks to protect itself and that adequate safeguards are provided in the parties’ agreements, such as guarantees and indemnities in the event of a defective title.

Representation and warranty insurance

Do sellers of non-public real estate businesses typically purchase representation and warranty insurance to cover post-closing liability?

Sellers of non-public real estate businesses are not likely to purchase representation and warranty insurance to cover post-closing liabilities. Rather, a clause is usually contained in the definitive agreement, which is, at best, a warrantee by the seller to the purchaser on reimbursement in the event of a defective title.

Review of business contracts

What are some of the primary agreements that the legal teams customarily review in the context of a real estate business combination, and does the scope vary with the structure of the transaction?

Generally, every material agreement needs to be reviewed, including title deeds of the real estate assets, leases, joint venture development agreements, contracts executed by the target company with other entities to determine the specific rights and liabilities thereunder and any other matter that will affect the transaction (eg, contracts that may be terminated following a change in control of the company). The scope of documents to be reviewed will depend on the structure of the transaction.

Breach of contract

Remedies for breach of contract

What are the typical remedies for breach of a contract in the context of a real estate business combination, and do they vary with the ownership of target or the structure of the transaction?

The typical remedies available to parties for a breach of contract in a real estate business combination are damages, specific performance and, sometimes, rescission.

When a party terminates the transaction or elects not to proceed with the purchase agreement, the other party may proceed against the breaching party to recover damages. Depending on the nature of the breach or before termination, particularly where damages may not be an adequate remedy, the seller may seek an order of specific performance to enforce the buyer’s obligations under any purchase agreement. Rescission may be granted on the basis of misrepresentation.

Financing

Market overview

How does a buyer typically finance real estate business combinations?

Real estate transactions are typically financed through a number of debt sources, including budgetary appropriations, commercial or merchant banks, insurance companies, state housing corporations, the Federal Mortgage Bank of Nigeria and thrift or credit societies.

Financing arrangements generally depend on the structure and size of the transaction, among other factors (eg, if it is a joint venture, it can be financed through equity acquisition or a combination of any financing options).

Seller’s obligations

What are the typical obligations of the seller in the financing?

The obligations of the seller vary depending on the structure of the financing. However, irrespective of the structure, the buyer will be required to procure or provide the relevant funds or provide the requisite commitments. The seller usually plays a collaborative role to complement the buyer’s efforts in securing finance, such as agreeing to provide relevant documents and information to assist the buyer in obtaining funding from finance sources.

Repayment guarantees

What repayment guarantees do lenders typically require in the context of a property-level financing of a real estate business combination? For what purposes are reserves usually required in the context of property-level indebtedness?

Regarding secured financing, income derived from the secured property is usually used to service the debt. Lenders typically require the following repayment guarantees:

  • bank guarantee;
  • personal guarantee; and
  • lien on shares.

These guarantees are typically required as a safety net in the event that the parties terminate the transaction before closing or in the event that one party has to make a certain monetary remittance on behalf of the other party (ie, tax remittance).

Reserves are usually required as security for loans granted by the lender to the borrower. This enables the lender to recover his or her loan if the borrower defaults in repayments.

Borrower covenants

What covenants do lenders usually insist on in the context of a property-level financing of a real estate business combination?

Covenants used in property-level financing usually include, but are not limited to:

  • a covenant as to good title of the borrower in the asset;
  • a covenant as to legal possession (constructive or otherwise) of the asset;
  • a covenant confirming that the property is not encumbered or a covenant providing the details of the encumbrance and plans of discharging it;
  • a covenant to indemnify in the event of any third-party interest;
  • the compliance with relevant laws applicable to the subject matter of the transaction;
  • the payment of all relevant taxes;
  • the disclosure of any material adverse change regarding the security; and
  • how to treat force majeure events.
Typical equity financing provisions

What equity financing provisions are common in a transaction involving a real estate business that is being taken private? Does it depend on the structure of the buyer?

In a real estate business, there is usually a mix of equity and debt financing. Investors usually ensure that provisions protecting their interests are provided in the relevant transaction documents, such as exit provisions and rights of control over the management of the real estate business. These provisions are dependent on the structure adopted by the buyer.

Collective investment schemes

REITs

Are real estate investment trusts (REITs) that have tax-saving advantages available? Are there particular legal considerations that shape the formation and activities of REITs?

Yes, they are available. All REITs have tax-saving advantages as they are exempted from paying some types of taxes.

The legal considerations that shape the formation and activities of REITs include:

  • the minimum share capital;
  • the investment policy and objective of the fund;
  • the geographical focus of the fund;
  • relevant fees and charges connected with investment in the fund;
  • valuation methodology and frequency of valuation;
  • the establishment of an anti-money laundering programme and duty to report suspicious activity; and
  • provision for meetings and voting quorum.

REITs are typically structured either as open-ended or closed-ended. Open-ended REITs have no fixed number of shares but must have at least 70 per cent of their total assets as real property. Closed-ended REITs, however, are mandated to have at least 75 per cent of the total assets as real property. REITs are generally treated as companies under the Companies Income Tax Act and have the following tax advantages:

  • Collective investment schemes are generally subject to CIT of 30 per cent but, as a result of waivers by the government, profits made from asset- and mortgage-backed securities are exempt from VAT as well as withholding tax.
  • Dividends of publicly traded REIT securities are exempt from withholding tax when dealt with by investors.
  • Sale of REIT securities are exempt from VAT and CGT.
  • Share purchases in corporate entities that hold REIT assets are exempted from CGT and stamp duty.
  • REITs are also eligible to obtain pioneer status if they are qualified.
Private equity funds

Are there particular legal considerations that shape the formation and activities of real estate-focused private equity funds? Does this vary depending on the target assets or investors?

The SEC is the body responsible for making rules that regulate the formation and activities of private equity funds. Several provisions regarding the formation of private equity funds have been issued by the SEC, and these provisions, including legal considerations that shape the formation and activities of private equity funds, include:

  • applicable taxes involved in the activities of the fund;
  • applicable taxes on income derived from by the fund (CIT);
  • the minimum share capital;
  • the investment policy and objective of the fund;
  • the geographical focus of the fund;
  • relevant fees and charges connected with investment in the fund;
  • valuation methodology and frequency of valuation;
  • the establishment of an anti-money laundering programme and duty to report suspicious activity;
  • the provision for meetings and voting quorum; and
  • the duties, responsibilities and liabilities of the fund manager.

Rule 560(b) of the SEC Rules and Regulations provides that fund managers:

  • are prohibited from soliciting funds from the general public (they are allowed to obtain funds from qualified investors only);
  • are prohibited from investing more than 30 per cent of the fund’s assets in a single investment; and
  • must have minimum paid up capital of 20 million naira if they are managing private equity funds.

These considerations are general in nature and do not depend on target assets or investors.

Update and trends

Key developments of the past year

Are there any other current developments or emerging trends that should be noted?

Key developments of the past year37 Are there any other current developments or emerging trends that should be noted?

No updates at this time.